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on Utility Models and Prospect Theory |
| By: | Attanasi, Giuseppe; Montesano, Aldo |
| Abstract: | In this paper ambiguity aversion is measured through the maximum price the decision maker is willing to pay in order to know the probability of an event. Two comparative problems are examined in which the decision maker faces an act: in one case buying information implies playing a lottery, while in the other case buying information gives also the option to avoid playing the lottery. In both decision settings, relying on Choquet expected utility model, we study how the decision maker’s risk and ambiguity attitudes affect the reservation price for information. These effects are analyzed for different levels of ambiguity of the act. |
| Keywords: | Ambiguity aversion; Choquet expected utility; Information about probabilities |
| JEL: | D81 D83 C91 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:23343&r=upt |
| By: | Aurora García-Gallego (GLOBE-Economics Dpt., U. Granada & LEE-Ec. Dpt., U. Jaume I (Spain)); Nikolaos Georgantzís (GLOBE-Economics Dpt., Universidad de Granada (Spain) & BELIS, Murat Sertel Center for Advanced Economic Studies, Istanbul Bilgi University (Turkey)); Ainhoa Jaramillo-Gutiérrez (Economics & Finance Dpt., Universidad Castilla la Mancha (Spain)); Melanie Parravano (LEE-Economics Dpt., Universitat Jaume I (Spain)) |
| Abstract: | We propose a simple task for the elicitation of risk attitudes, initially used in Sabater-Grande and Georgantzís (2002) [SGG], capturing two dimensions of individual decision making: subjects’ average willingness to choose risky projects and their sensitivity towards variations in the return to risk. We report results from a large dataset obtained from the test and discuss regularities and the desirability of its bi-dimensionality when used to explain behaviour in other contexts. |
| Keywords: | Decision-making; Lotteries; Risk aversion |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/12&r=upt |
| By: | Reto Foellmi; Rina Rosenblatt-Wisch; Klaus Reiner Schenk-Hoppé |
| Abstract: | This paper studies the Cass-Koopmans-Ramsey model of optimal economic growth in the presence of loss aversion and habit formation. The representative agent's preferences for consumption can be gradually varied between the standard constant intertemporal elasticity of substitution (CIES) case and Kahneman and Tversky's prospect utility. We find that the transitional dynamics of optimal consumption paths differ distinctly from the standard model, in particular consumption smoothing is more pronounced. We also show that prospect utility can cause the economy to remain in a steady state with low consumption and low capital. |
| Keywords: | Ramsey growth model; prospect theory; loss aversion; optimal consumption |
| JEL: | E21 O41 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1010&r=upt |
| By: | Kevin J. Lansing; Stephen F. LeRoy |
| Abstract: | Researchers on variance bounds tests of stock price volatility recognized early that risk aversion can increase the volatility of prices implied by the present-value model. This finding suggests that specifying risk neutrality may induce a bias toward rejecting the present-value model insofar as real-world investors are risk averse. However, establishing that risk aversion may increase stock price volatility does not, by itself, have implications for the presence or absence of excess volatility. This is so because risk aversion also affects the upper-bound volatility measure computed from "perfect foresight" (or "ex post rational") stock prices. Consequently, while high risk aversion implies high volatility in some settings, it may or may not imply excess volatility. This paper compares price volatility computed from real-world data to model-predicted volatility measures in a setting that allows for risk aversion. Using variance bounds tests based on the price-dividend ratio, we find evidence of excess volatility in long-run U.S. stock price data for relative risk aversion coefficients below 5. For higher degrees of risk aversion, the evidence for excess volatility is less clear. We also ask whether variance bounds for returns can be established in settings involving risk aversion and autocorrelated dividend growth. We show that the answer is no. Except in special cases, the present-value model does not impose bounds on return volatility in our setting. |
| Keywords: | Stock - Prices |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-24&r=upt |
| By: | Velu, C.; Iyer, S.; Gair, J.R. |
| Abstract: | Players cooperate in experiments more than game theory would predict. We introduce the ‘returns-based beliefs’ approach: the expected returns of a particular strategy in proportion to total expected returns of all strategies. Using a decision analytic solution concept, Luce’s (1959) probabilistic choice model, and ‘hyperpriors’ for ambiguity in players’ cooperability, our approach explains empirical observations in various classes of games including the Prisoner’s and Traveler’s Dilemmas. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2 × 2 games shows that with loss aversion, returns-based beliefs explain the data better than other equilibrium concepts. |
| Keywords: | Rationality, Subjective Probabilities, Returns-Based Beliefs |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1058&r=upt |
| By: | Eric Danan (THEMA - THéorie Economique, Modélisation et Applications - université de Cergy-Pontoise); Thibault Gajdos (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Jean-Marc Tallon (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | We analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences. More precisely, we endow individuals ans society with sets of possible von Neumann-Morgenstern utility functions over lotteries. We generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function. This class turns out to be considerably broader for indeterminate than for determinate utilities, where it basically reduces to utilitarianism. In particular, aggregation rules may differ by the relationship between individual and social indeterminacy. We characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities, although they still fail to systematically yield a determinate social utility. |
| Keywords: | Aggregation, vNM utility, indeterminacy, neutrality, utilitarianism. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00523448_v1&r=upt |
| By: | Ilja Neustadt (Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University) |
| Abstract: | Due to the mixed empirical evidence bearing on the economic determinants, beliefs have been at the center of attention of research into preferences for income redistribution. We elicit preferences for income redistribution through a Discrete Choice Experiment performed in 2008 in Switzerland and relate them to several behavioral determinants, in particular to religious beliefs. Estimated marginal willingness to pay (WTP) is positive among those who do not belong to a religious denomination, and negative otherwise. However, the marginal WTP is shown to increase with a higher degree of religiosity. Moreover, those who state that luck or connections play a crucial role in determining economic success exhibit significantly higher WTP values than those who deem e?ort to be decisive. |
| Keywords: | Income redistribution, beliefs, religiosity, welfare state, preferences, willingness to pay, discrete choice experiments |
| JEL: | C35 C93 D63 H29 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:1009&r=upt |
| By: | Coralio Ballester (Universidad de Alicante); Penélope Hernández (Universidad de Valencia.) |
| Abstract: | The observation of the actual behavior by economic decision makers in the lab and in the field justifies that bounded rationality has been a generally accepted assumption in many socio-economic models. The goal of this paper is to illustrate the difficulties involved in providing a correct definition of what a rational (or irrational) agent is. In this paper we describe two frameworks that employ different approaches for analyzing bounded rationality. The first is a spatial segregation set-up that encompasses two optimization methodologies: backward induction and forward induction. The main result is that, even under the same state of knowledge, rational and non-rational agents may match their actions. The second framework elaborates on the relationship between irrationality and informational restrictions. We use the beauty contest (Nagel, 1995) as a device to explain this relationship. |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/10&r=upt |
| By: | Giorgio Coricelli (University of Southern California and Centre of Cognitive Neuroscience, Bron (Lyon), France.); Rosemarie Nagel (Universitat Pomepu Fabra) |
| Abstract: | Bounded rational behaviour is commonly observed in experimental games and in real life situations. Neuroeconomics can help to understand the mental processing underlying bounded rationality and out-of-equilibrium behaviour. Here we report results from recent studies on the neural basis of limited steps of reasoning in a competitive setting – the beauty contest game. We use functional magnetic resonance imaging (fMRI) to study the neural correlates of human mental processes in strategic games. We apply a cognitive hierarchy model to classify subject’s choices in the experimental game according to the degree of strategic reasoning so that we can identify the neural substrates of different levels of strategizing. We found a correlation between levels of strategic reasoning and activity in a neural network related to mentalizing, i.e. the ability to think about other’s thoughts and mental states. Moreover, brain data showed how complex cognitive processes subserve the higher level of reasoning about others. We describe how a cognitive hierarchy model fits both behavioural and brain data. |
| Keywords: | Game theory, Bounded rationality, Neuroeconomics |
| Date: | 2010–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:10/11&r=upt |